This thesis includes five chapters. Chapter 1 introduces study background, motivation and research questions. Chapter 2 consists of theoretical framework. The theoretical framework explains the concepts of corporate social performance and corporate envi-ronmental performance. After that, earlier studies conducted on the link between CEP/CSP and CFP are listed and explained. Measurement challenges and studies that have resulted in different results (positive, no link, negative) are considered. Chapter 3 explains the methodology used in this thesis in detail. The chapter includes details re-garding research design, target companies, data collection and data analysis. The envi-ronmental data evaluation criteria developed specifically for this study is presented in detail. Chapter 4 presents study results and analysis. Corporate environmental perfor-mance of the target companies is analysed first including specific figures on pollution prevention, clean energy, recycling, pioneering products, external recognition and awards as well as hazardous waste performance. After that, CFP figures are listed and then the link between CEP and CFP is analysed through statistical computing. In chap-ter 5, study results are discussed and compared with earlier studies. Study limitations and possible future research avenues are also discussed.
2 THEORETICAL FRAMEWORK 2.1 Corporate social performance
2.1.1 Carroll’s CSP model
Archie Carroll (1979) is one of the early contributors to corporate social performance research. In his paper, he develops a conceptual model that describes significant aspects of corporate social performance. The model consists of three distinct aspects of CSP answering to:
1. What is included in corporate social responsibility?
2. What social issues the firm must address? and
3. What is the firm’s philosophy of social responsiveness? (Carroll 1979.) Carroll suggests that corporate social responsibility includes four categories:
economic, legal, ethical and discretionary responsibilities. A business institution is the basic economic unit of our society and it has a responsibility to produce goods and ser-vices that society wants and to sell them at profit. Therefore, it has economic responsi-bilities. Legal responsibilities stem from laws and regulations that business must com-ply with. These ground rules are set by society that expects the economic responsibili-ties to be fulfilled within them. Although economic and legal responsibiliresponsibili-ties include ethical norms, there are also other actions, which are not necessarily stated in law but are still expected from the firm by society. These are ethical responsibilities and they can be very challenging for organizations to deal with. There is a lot of discussion about what is ethical and what is not. Discretionary responsibilities can also be challenging for business to deal with as society has certain expectations that are not clear-cut ones. Dis-cretionary responsibilities are not required by law or generally expected of business in an ethical sense, which is why they are left to individual judgment and choice. Some examples of these kinds of responsibilities are philanthropic contributions, providing day-care centres for working mothers, or training the hard-core unemployed. (Carroll 1979.)
After answering the question of what is included in corporate social responsibil-ity, the next aspect is to determine what social issues firms must address. There are ma-jor differences in the interests of different organizations, which is why also social re-sponsibility varies from firm to firm. For example, a mining company and a bank have very different environmental impacts so naturally also their environmental responsibili-ties are different. While Carroll points out that issues change and they differ for differ-ent industries, he does not thoroughly determine what specific social issues firms need to address. He leaves question two to an argument that “… social issues must be identi-fied as an important aspect of corporate social performance, but there is by no means agreement as to what these issues should be (Carroll 1979, 501).”
Thirdly, it is necessary to determine the philosophy, mode, or strategy of a firm for responding to social issues. This respond strategy is also called social responsive-ness and it can range from no response, where a firm does nothing, to a proactive re-sponse, where firm does a lot. In his model, Carroll uses a responsiveness scheme de-veloped by Ian Wilson (Wilson 1974 in Carroll 1979). In Wilson’s responsiveness con-tinuum, the business strategies identified are reaction, defence, accommodation, and
proaction. Social responsiveness presents the action phase of corporate social perfor-mance management in which managers respond to social expectations. (Carroll 1979.)
From the three aspects described above, Carroll develops a Corporate Social Performance Model that can be seen in Picture 1 below. The first aspect is formed ac-cording to the definition of corporate social responsibility and thus includes economic, legal, ethical, and discretionary components. The second aspect covers the range of so-cial issues that management needs to address and it can vary greatly from organization to organization. Consumerism, environment, discrimination, product safety, occupation-al safety, and shareholders are few common issues mentioned as examples. Thirdly, there is a social responsiveness continuum ranging from reaction to proaction. There-fore, corporate social performance requires that:
1. organization’s social responsibilities are assessed,
2. the social issues the organization must address are identified, and 3. a response philosophy is chosen. (Carroll 1979.)
Picture 1 Carroll’s Corporate Social Performance Model (Carroll 1979, 503)
Carroll emphasizes himself that his CSP model is not the ultimate conceptualiza-tion but rather a modest step toward understanding the aspects of social performance.
The model shows that economic performance and social responsibility are not distinct from each other but that economic responsibilities are only one part of the total corpo-rate social responsibilities. (Carroll 1979.) His CSP model fails to identify what social issues organizations must address but instead points out the need to address social issues as important in organizations. The model has been analysed by several researchers who have developed it further. Maybe the most important revisit is that of Wood’s (1991) which is explained next.
2.1.2 Wood’s CSP model
In her paper, Wood (1991) combines different attempts to define corporate social per-formance and addresses the problems related to each definition. She specifically
contin-ues the work of Wartick and Cochran (1985) who developed their CSP model based on Carroll’s (1979) work presented above. Wartick and Cochran (1985) address main chal-lenges related to corporate social responsibility (economic responsibility, public respon-sibility, and social responsiveness), and discuss a new dimension of social issues man-agement to corporate social performance model. As a result, CSP model’s dimensions of corporate social responsibilities and corporate social responsiveness are similar to Carrol’s model but the ‘social issues involved’ is replaced with ‘social issues manage-ment’ that includes issues identification, issues analysis, and response development.
Therefore, Wartick and Cochran provide more insight into what issues a firm must ad-dress and they manage to adad-dress many important questions concerning Carroll’s ver-sion. However, Wood (1991) argues that their model still includes some problems that she aims to solve.
As an outcome, Wood defines corporate social performance as ‘a business or-ganization’s configuration of principles of social responsibility, processes of social re-sponsiveness, and policies, programs, and observable outcomes as they relate to the firm’s societal relationships.’ (Wood 1991, 693). It has been argued that this definition is a classic one and “… one of the most influential, helpful, parsimonious, and yet com-prehensive conceptualizations of CSP (Orlitzky et al. 2003).” According to the defini-tion, the author also reformulates CSP model. The CSP model is formed of three facets:
principles of corporate social responsibility, processes of corporate social responsive-ness and outcomes of corporate behaviour. The corporate social performance model is presented in Table 1 below.
Table 1 The Corporate Social Performance Model (Wood 1991, 696)
Three principles of corporate social responsibility are specified as institutional, organizational and individual principle. Institutional principle refers to legitimacy by stating that business earns its legitimacy and power from society, which is why it should not abuse its power. If a business uses its power in a way that lacks society’s approval, it will probably lose it. The institutional principle outlines firm’s generic obligations and specifies what is expected from any business. The organizational principle refers to
pub-The Corporate Social Performance Model
Principles of corporate social responsibility Institutional principle: legitimacy
Organizational principle: public responsibility Individual principle: managerial discretion Processes of corporate social responsiveness
Environmental assessment Stakeholder management Issues management
Outcomes of corporate behaviour Social impacts
Social programs Social policies
lic responsibility and defines the sphere of responsibility for business. Firms are not re-sponsible for solving all society’s problems but they are rere-sponsible for solving those problems that they have caused and for helping to solve issues that are related to their business operations. In other words, social responsibilities the firm addresses need to be relevant to the firm, which is why CSR will vary from company to company. After or-ganizational principle, there is still a lot of room for managerial discretion leading us to the principle three. The individual principle emphasizes individuals in organizations and manager’s role as a moral actor. Social responsibilities are not met by abstract organiza-tional actors but by individual human beings who are not totally limited by formal cor-porate procedures or resource availabilities. Organizational environment is full of choices that are made by moral actors. (Wood 1991.)
Corporate social responsiveness refers to a firm’s capacity to respond to social pressures providing an action counterpoint to the CSP model. Environmental assess-ment refers to responsiveness as an ecological concept as firms will survive if they adapt to environmental conditions. Business environment is changing all the time and in addition to economic and technological environments, social, political and legal envi-ronments are equally important. The better the firm is able to scan its environment, the better its social and financial performance will turn out. Different stakeholders set vary-ing expectations and demands on companies and part of responsiveness is the need to manage these multiple and differing stakeholder relationships. Issues management aims at minimizing surprises by managing firm’s responses to social issues through internal and external processes management. Therefore, environmental assessment provides the context, stakeholder management the actors and issues management the issues in the processes of corporate social responsiveness. All three are interlocked as information about the environment is a prerequisite for responding, issues involve stakeholders’ in-terest and stakeholders are involved in issues. (Wood 1991.)
When assessing corporate social performance, the outcomes of corporate behav-iour are under direct interest. They are divided into social impacts, social programs and social policies. Social impacts of corporate behaviour can be negative or positive. For example, factory disasters, oil spills and harmful products are negative social impacts of business behaviour while provision of jobs, payment of taxes and technological innova-tion are examples of positive social impacts of business behaviour. Some social impacts can be very challenging to measure economically, like air pollution or beauty of a wil-derness area. A company can adopt a corporate social program to invest its resources in a specific course of action in order to meet specific needs that the company sees as so-cially desirable. Social policies again can guide decision making in problem solving or in other areas of great importance to the company. At the same time, this is risk man-agement as social policies help to manage threats in the areas of interest and
im-portance. Corporate social policies can be argued to have three objectives that are close-ly linked to the three principles of corporate social performance: 1. institutional – to maintain the legitimacy of business, 2. organizational – to improve firm’s adaptability with its environment, and 3. moral/ethical – to guide a culture of ethical choice. (Wood 1991.)
The principles of corporate social responsibility at the institutional, organiza-tional, and individual levels explain the motivations behind human and organizational behaviour. Responsive processes of environmental assessment, stakeholder manage-ment and issues managemanage-ment show how companies adapt to the external environmanage-ment and as outcomes of corporate behaviour, social impacts, programs and policies represent the actually observable to outside part of corporate social performance. While principles
motivate companies and individuals to social responsibility, processes form the “how to” part and outcomes again are the visible part to outside based on which social respon-sibility is assessed.
2.1.3 Comparing the models
The CSP model of Wood differs from that of Carroll by moving further – especially to the outcomes of corporate behaviour. They both see that the first facet of CSP is defini-tion of corporate social responsibility, although Carroll divided CSR into four categories (economic, legal, ethical, and discretionary), whereas Wood formed three principles of CSR (institutional, organizational, and individual principles). Wood’s principles, how-ever, seem to be based on Carroll’s categories. Roughly speaking it can be argued that Carroll’s economic, legal and ethical categories are similar to Wood’s institutional prin-ciple, Carroll’s model’s third facet of social issues involved is similar to Wood’s organ-izational principle, and Carroll’s discretionary category is similar to Wood’s individual principle.
While Wood includes the sphere of social issues a firm must address under the principle of public responsibility and defines rather clearly the limits for this, Carroll did not manage to give borders for what the firms are responsible for even though identify-ing them forms an own facet, ‘social issues involved’, in his model. Accordidentify-ing to
Wood, organizations are responsible for fixing what they have broken and for helping to solve issues that are related to their business operations. However, both researchers’
CSR facets are still rather similar as both are based on society’s general expectations and approval as well as managers’ role as moral decision makers. And although Wood manages to give limits for what to address, her conclusion is still rather wide and open to interpretations.
The second facet of Wood’s CSP model, processes of corporate social siveness, is similar to the last aspect of Carroll’s model, philosophy of social respon-siveness. The basic idea is similar in both: what is the firm’s response strategy and how well is it able to adapt to its environment. In both models, social responsiveness is the action part of corporate social performance. However, Carroll divides responsiveness philosophies into a spectrum consisting of reaction, defence, accommodation and proac-tion strategies, whereas Wood specifies corporate social responsiveness into processes of environmental assessment, stakeholder management, and issues management, not on a spectrum.
While Carroll leaves outcomes of corporate behaviour out of his CSP model, Wood emphasizes them as an own facet of CSP. This might be because measuring cor-porate social performance has increased its importance and popularity and as Wood notes, the outcomes are the part of CSR that is visible to outsiders. Therefore, in the end, assessment of corporate social performance is based on the outcomes of corporate behaviour. Wood suggests that economic, legal, ethical and discretionary categories can work as domains of CSR principles that can guide social policies. For example, an out-come of acting within discretionary domain of organizational principle could be to in-vest the firm’s charitable resources in social problems related to the firm’s primary and secondary involvements with society. Moving to outcomes and performance is probably the most important contribution of Wood’s model. (Wood 1991.)
2.1.4 Corporate environmental performance
In this study, only environmental performance is investigated which is why it is also shortly defined in this chapter. Several studies investigating the link between corporate social performance and corporate financial performance use environmental performance as a proxy for social responsibility. Also in the business community, social responsibil-ity usually includes both social and environmental performance. (Orlitzky 2003.) Many international corporate environmental management standards, such as ISO and GRI guidelines, use the construct of CEP in their standards. In addition, CEP concept has been used in several studies. (Poser, Guenther & Orlitzky 2012.) Few definitions are elaborated next.
Poser, Guenther and Orlitzky (2012) have conducted an overview of the differ-ent corporate environmdiffer-ental performance definitions. They have summarized various CEP definitions used in the conceptual and empirical papers so far and based on that, provide an overview on the different contexts used. The authors include the use of ener-gy and water, greenhouse gas emissions and toxic releases and spills in CEP. They have listed some of the latest CEP definitions used in research, including for example the def-initions of Clemens and Bakstran (2010, 395) “Environmental performance is a multi-dimensional construct with factors including environmental impact on the biosphere, customers, employees, the local community, and other stakeholders.”, and Yang, Hong
& Modi (2010, 252):” Environmental performance refers to the organization’s perfor-mance with respect to their environmental responsibilities.”. Key elements for corporate environmental performance are identified as the following: environmental impacts caused by company’s operations covering operations management and inputs and out-puts, as well as strategic dimensions for managing stakeholder expectations. (Poser, Guenther & Orlitzky 2012.)
Schultze and Trommer (2011) study the concept of corporate environmental per-formance and its measurement. They choose to refer to Wood’s (1991) CSP framework because as stated also earlier, it is argued to be the most comprehensive, influential and helpful conceptualization of CSP. Following Wood’s model, CEP is considered a multi-dimensional construct covering the principles of environmental responsibility and the processes of environmental responsiveness which predict future environmental impacts and outcomes. Based on earlier studies, the authors summarize environmental stake-holder demands being the following: reduce environmental externalities (environmental advocates), comply with regulations (government), avoid negative health and safety ef-fects (neighbours, employees, consumers), reduce environment-related follow-up costs of products (consumers), reduce environmental risks (contracting partners, govern-ment), increase environmental reputation (contracting partners), and increase transpar-ency and credibility (all stakeholders). After further operationalization of CEP, the au-thors argue that when measuring environmental performance, the following aspects should be considered: 1. Special interests of the stakeholder groups under investigation, 2. Special characteristics related to the company/products, and 3. External factors rele-vant to the expectations of stakeholders. (Schultze & Trommer 2011.)
2.2 CSP-CFP link
The relationship between corporate social performance (CSP) and corporate financial performance (CFP) has been studied for 45 years and it has aroused a lot of interest among both researchers and managers. Bragdon and Marlin (1972 in Margolis, Elfen-bein & Walsh 2007) found a positive relationship already in 1972 but the research still continues. For example, 35 years later Margolis, Elfenbein and Walsh (2007) covered 167 studies made on the topic in their meta-analysis, concluding that all these studies later, managers might still be where they were in 1972. Results during the 45 years of research have been inconclusive and conflicting and at some point, even a moratorium of CSP-CFP research was called. Both positive and negative links have been found as well as mixed results or no link at all. In addition to the nature of the link, also temporal ordering of the relationship has remained unclear. (Orlitzky et al. 2003; Margolis, Elfenbein & Walsh 2007.)
There are two different ways of understanding the mechanism of CSP-CFP link.
In the first approach, corporate social performance is seen as a distinctive resource that affects costs and thus financial performance. CSP can generate benefits such as
In the first approach, corporate social performance is seen as a distinctive resource that affects costs and thus financial performance. CSP can generate benefits such as